Having previously noted the 10Y yield bogeys by SocGen, Goldman and JPM, above which the S&P would start to groan, which are at 2.60%, 2.75% and 2.75%, respectively, overnight we got yet another datapoint to add to this series: that of Jeffrey Gundlach, who during yesterday's webcast to DoubleLine investors said 10Y rates may climb to 3% by next year as deficits and inflation rise under the Trump presidency, "a move that would hurt markets." The 10Y is currently trading just below 2.50%
“We’re getting to the point where further rises in Treasuries, certainly above 3 percent, would start to have a real impact on market liquidity in corporate bonds and junk bonds,” Gundlach said on Tuesday as reported by Bloomberg.
“Also, a 10-year Treasury above 3 percent in my view starts to bring into question some of the aspects of the stock market and of the housing market in particular.”
Bonds are 'cheapest' to stocks in over two years...
In just under 5 hours, the Fed is expected to raise its Fed Funds rate by 0.25% for the first time this year and only the second time since the 2008 financial crisis.
Gundlach said on the webcast that he will be looking after the meeting for signs that Fed members are growing inclined to raise rates more aggressively in the next couple of years as the economy heats up.
Gundlach also said that he has increased the average duration of holdings in his fund as rates have risen since July, while still holding debt with a shorter duration, and lower risk, than the benchmark Bloomberg Barclays U.S. Aggregate bond index.
It certainly appears bond yields have run up relative to inflation expectations post-Trump...
In a follow up call with Reuters, Gundlach repeated that "3 percent is a problem. If the 10-year goes above 3 percent, you would also have to say unequivocally you have seen the end of the bond bull market."
Gundlach also said it is reasonable to be nimble and do some purchasing of Treasuries. "I think it is an okay buy right now," he said. "We hate the market less. We are a little bit less defensive," Gundlach said. When bond prices are down, DoubleLine likes it more, he said.
If the 10-year yield exceeds 3 percent next year, high-yield "junk" bonds will drop into a "black hole of illiquidity," Gundlach said.
Gundlach said the Standard & Poor's 500 Index, which is up 6.5 percent since the election, could reverse their solid momentum at the latest by Trump's Jan. 20 inauguration. Gundlach said he thinks the dollar is going to soften in the weeks ahead as "bullishness in the dollar is pretty entrenched."
For those who missed it, Gundlach's full presentation from yesterday's webcast is below.